The year 2004 was a decidedly mixed one for the life insurance business. The industry saw a number of positive trends, including gains in the sale of universal life and a rise in corporate-owned life insurance for nonqualified deferred compensation and supplemental executive retirement plans.
But insurance companies continued to suffer from a decline in new and experienced producers. Congressional passage of lifetime savings accounts and permanent repeal of the estate tax also could crimp life policy sales significantly, advisors warn.
Robust sales in 2004 gave the industry reason to cheer. A third quarter report on U.S. individual life insurance sales from LIMRA International, Windsor, Conn., shows a 6% rise in annualized premiums during the quarter. The gain contributed to a 9% increase for the first 9 months of 2004 when compared to the same period of 2003.
Fueling most of the growth was sales of universal life insurance. UL revenue, which was up 12% during the third quarter and 20% for the year, now accounts for the largest share (37%) of individual, permanent life policy sales, a rise of 2% over the year-ago period. Underpinning ULs dominance is the increasing popularity of long-term, secondary guarantees, the report noted.
While variable life and variable universal life products collectively enjoyed a rise of 2% for the first 9 months of 2004 (7% if one variable underwriter is excluded), whole life annual premiums declined 2% for the quarter and the 9-month period. The products slide in market share during the past decade reflects, in part, the diminishing number of its chief backers, dividend-paying mutual life insurance companies.
But Elaine Tumicki, a corporate vice president of product research at LIMRA, says there always will be a place for the product.
"Whole life policies continue to be used in 412(i) pension plans for small companies because of 412(i)s guarantee requirements," says Tumicki. "But given the IRS scrutiny of these plans during the past year, their fortunes will ebb and flow with the regulatory environment."
The same applies to survivorship (or second-to-die) policies. While survivorship premiums posted 22% and 16% gains for the third quarter and first 9 months of 2004, respectively, Tumicki cautions against long-term optimism. The reason: the prospect of permanent repeal of the estate tax, which would render survivorship death benefits unnecessary to pay for it.
But even if the estate tax were permanently repealed, Tumicki says second-to-die policies may still be needed to cover capital gains taxes at death. The Economic Growth and Tax Relief Reconciliation Act of 2001, which gradually phases out the estate tax before sunsetting in 2011, also repealed the step-up in basis rule for property received from a decedent whose death occurs after 2009. EGTRRA thus transformed the estate tax into an income tax payable by estate beneficiaries when property is sold.
Permanent repeal of the estate tax, however, should not be expected if organizations representing the insurance community have anything to say about the matter. Prominent among them is the National Association of Insurance and Financial Advisors, Falls Church, Va. NAIFA, with 65,000-plus members nationwide, advocates estate tax "reform," which might entail, for example, elimination of the estate tax for individuals whose income or assets fall below a certain threshold.
NAIFA is engaged in other lobbying efforts. Topping the list: preventing congressional enactment of a bill allowing for Lifetime Savings Accounts. As now envisioned by the Bush administration, the proposal would permit individuals to deposit up to $5,000 per year tax-free into an LSA account. They also could withdraw the money at any time, tax-free and without penalty.
"These accounts will entice people into short-term savings, killing permanent life insurance and probably annuities as well," says NAIFA CEO David Woods. "Who wouldnt buy term [insurance] and invest the difference in a lifetime savings account? There is as yet no legislation, but were certainly making our concerns known."
A long-term goal of NAIFA, making life insurance premiums tax-deductible, would aid in incenting more middle income people to obtain life insurance, Woods claims. If this market segment continues to be underservedan estimated one-third of American households lack a life policy or dont have enough coveragethen Congress might be tempted to withdraw the vehicles tax benefits. Woods adds that Wall Street, because of its focus on short-term profits, shares part of the blame for the current situation.
"If Wall Street continues to focus on companies 90-day performance, then CEOs of [insurance] stock companies are very much limited in their ability to make long-term investments," he says. "But if Wall Street begins to be concerned about long-term shareholder value, then I have great hope the industry will begin to solve the middle market problem."
